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Rating Action:

MOODY'S ASSIGNS B3 RATING TO AXIA INCORPORATED'S SENIOR SUBORDINATED NOTES AND B1 RATING T0 ITS SENIOR SECURED CREDIT FACILITIES

15 Jul 1998
MOODY'S ASSIGNS B3 RATING TO AXIA INCORPORATED'S SENIOR SUBORDINATED NOTES AND B1 RATING T0 ITS SENIOR SECURED CREDIT FACILITIES New York, 07-15-98 -- Moody's Investors Service assigned a B3 rating to Axia Incorporated's (Axia) $100 million of senior subordinated notes, due 2008, and a B1 rating to its $76.5 million of senior secured credit facilities. This is the first time that Moody's has rated the debt of the company, which operates the following three distinct businesses: Ames (the largest U.S. supplier and distributor of automatic taping and finishing, or "ATF" tools), Nestaway (a producer of formed wire products, particularly dishwasher racks), and Fischbein (a producer of industrial bag closing equipment and flexible conveyors). The outlook is stable.
The ratings reflect the company's high leverage, weak balance sheet, moderate interest coverage, history of leveraged financings, stable, but lackluster consolidated financial performance over the past three years, weighted importance of Ames to the company's credit profile as well as its exposure to the construction cycle, and customer concentration at Nestaway.
However, the ratings also reflect the company's market leadership positions in niche markets; strong return on assets; increasing penetration of the market for ATF products in the eastern part of the U.S.; diverse base of products and markets, as well as high percentage of variable costs - all of which limit the company's downside in a recession scenario; as well as stated commitment from the equity sponsor to support the transaction with additional capital.
The senior secured credit facilities consist of a $35 million, six-year term loan, a $1.5 million, four-year ESOP term loan facility, a $15 million, six-year revolving credit facility, and a $25 million, six-year acquisition facility. The term loan, ESOP loan and $3.3 million of the revolving credit facility is expected to be drawn upon closing. The borrower is Axia Incorporated, the operating company. The B1 rating reflects the benefits and limitations of the collateral package, which consist of all tangible and intangible assets of the company and the stock of its subsidiaries. Drawings under the revolving credit facility are subject to a borrowing base formula. Collateral coverage on a tangible basis will be thin.
The B3 rating on the senior subordinated notes reflects their contractual subordination to senior debt, including outstandings under the secured credit facilities. The notes are also being issued by Axia Incorporated, and are guaranteed on a senior subordinated basis by each of the company's domestic subsidiaries.
The proceeds of the financing package are being used for the buyout of the company by an investor group led by The Sterling Group and management. The total price is $167.8 million (including fees and expenses) which represents a 8.8 times multiple of latest twelve month pro forma EBIT of $19.1 million (6.5 times multiple of latest twelve month pro forma EBITDA of $25.7 million). The total equity contribution will be $28 million. The investor group will own approximately 75-80% of the company post-closing, with the remainder owned by management (on a fully-diluted basis). This is the fourth leveraged financing of the company since 1984, when it underwent its first leveraged buyout. The Sterling Group has indicated that as financial sponsor, it will support this transaction on an ongoing basis, including the addition of capital.
Following this transaction, pro forma debt will be $140 million, a 7.3 times multiple of pro forma EBIT (5.4x coverage of EBITDA). EBIT coverage of pro forma interest of $14 million will a moderate 1.4 times. (1.8x on an EBITDA basis). Annual capital expenditures of $5.3 million will cause EBITDA coverage to fall to 1.5 times. The balance sheet is weak because total assets of $190 million are eroded by $131 million of goodwill, intangibles, and deferred charges, resulting in approximately $60 million of tangible assets and $105 million of negative tangible net worth.
On a consolidated basis, over the past three years revenues have been relatively flat at between $104-$105 million ($107.8 million for the twelve months ended 3/31/98), although operating earnings have increased by approximately 26%, to $19.4 million, producing an impressive 20% return on assets in fiscal 1997. (Pro forma, return on assets will drop by 50%, due to the write-up of total assets, reflecting a substantial increase in goodwill.) Sales increases of 25% at Ames over this time period were offset by a 17% decline at Nestaway, versus flat sales at Fischbein. Sales at Ames accounted for fully 40% of 1997 consolidated sales versus 34% at Nestaway and 25% at Fischbein. Consolidated EBITDA increased by 16%, to $24.1 million. Ames contributed a disproportionately higher percentage of EBITDA, whereas Fischbein was disproportionately lower.
Clearly, consolidated sales and earnings have been driven primarily by Ames, the largest U.S. supplier and distributor of ATF tools. Ames rents tools and also sells them under the "Tapetech" and "Tapemaster" brand names through over 125 distributions locations, (including 57 company-managed stores and 53 franchised operations), allowing professional interior finishing contractors to finish and prepare drywall for painting on a much faster and more efficient basis than traditional hand-taping. Although this application is construction-related (and therefore, highly cyclical), management believes penetration is mostly in the west. The flip side is that management sees an opportunity to increase penetration of the eastern U.S., where most of all drywall taping is done by hand.
Nestaway's operating performance suffered in the last three years by the loss of two OEM customers, who took certain production in-house. Despite this loss, Nestaway maintains a significant market share in the manufacture of formed wire products, producing approximately 68% of all independently manufactured dishwasher racks, and an estimated 17% of all dishwasher racks produced in the U.S. Strong customer concentration is noted in this division, as Maytag accounted for approximately 20% of consolidated 1997 revenue. Nestaway's outlook is positive as a result of increased sales to existing customers and recent new contracts. To this end, Nestaway's first quarter sales increased 20.5% to $10.6 million, reflecting these developments. Furthermore, a repetition of its past three-year performance is unlikely because 90% of Nestaway's 1997 revenues are under contracts through 2002 and beyond.
Fischbein, (with sales of approximately $27 million), has experienced modest growth in the past three years (6%, net of discontinued operations and certain currency items), reflecting the mature nature of the division's industrial bag closing equipment, which consists primarily of sewing systems, parts, and supplies for heavy-duty, industrial capacity bags. This division also manufactures flexible conveyors as well as warehouse storage racks. Fischbein differs from the company's other two businesses in that over half of its sales are in a broad number of international markets, increasing the geographic diversity of the company's revenue base.
On a consolidated basis, Moody's believes the company's businesses are sufficiently diversified across business lines, customers, and geographically to reasonably support its leverage, even in a recession scenario. Sensitizing for a decline in revenues and margins for each of the businesses (mirroring historical declines) would produce a consolidated decline in revenues and EBITDA of approximately 14.6% and 17%, respectively, under Moody's downside case. In that event, the company would still produce approximately $21.6 million of EBITDA, sufficient to cover $14 million of interest and $5 million of annual capital expenditures. Moody's believes margins would be less impacted than revenues in a recession, because a high percentage of the company's costs are considered variable.
Axia Incorporated, located in Lombard, Illinois, operates the following three distinct businesses: Ames (the largest U.S. supplier and distributor of automatic taping and finishing, or "ATF" tools), Nestaway (a producer of formed wire products, particularly dishwasher racks), and Fischbein (a producer of industrial bag closing equipment and flexible conveyors). For the twelve months ended 3/31/98, the company produced net revenues and pro forma EBITDA of $107.8 million and $25.7 million, respectively.

No Related Data.
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